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CSSF circular 13/560 - MiFID suitability test - 21/02/2013


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Amendment of Circular CSSF 07/307

On 20 February 2013, the CSSF has published the new circular 13/560 which adds an Annex IV to Circular CSSF 07/307, transposing the guidelines 2012/387 of the European Securities and Markets Authority (ESMA) "Guidelines on certain aspects of the MiFID suitability requirements" concerning Chapter 6 - Suitability test - of Circular CSSF 07/307. The guidelines are presented on Annex II of the document for the English version.

CSSF also published an updated version of the CSSF 07/307 circular as modified in its appendices by the new CSSF 13/560.

Who is concerned ?

  • All investment firms (credit institutions and PSFs) and management companies providing advisory or portfolio management services as defined in the appendix I of MiFID.
  • Mainly relevant for so called “retail clients”, even if applicable to professional clients to the extent they are relevant.
  • Come into force with immediate effect and it is expected to comply with guidelines.

Main content

These guidelines aim at clarifying the suitability requirements for a service to a client. They must been interpreted in continuity of the principles applicable to date.

The guidelines provide details and illustrations about expectations in the fields of client profiling and execution of suitability tests.

We propose to outline the main content by grouping the guidelines into five areas:

Information to clients about the suitability assessment

Investment firms should take steps to help clients to understand the purpose of the requirements and should encourage them to provide accurate and sufficient information. Firms should inform their clients about the suitability assessment, the objectives, the way it is organised, the underlying. Such information should be provided in format enabling ex-post controls.

Firms should also make sure that the client understands the notion of investment risk as well as the relationship between risk and return on investments. To this end for instance, firms should consider using indicative, comprehensible examples of the levels of risks.

The guidelines remind also that suitability assessment is the responsibility of the investment firm: firms should avoid giving the impression that it is the client who decides on the suitability.

Proportionality of client information collected

The guidelines stress out the proportionality principle in the extent of information to be collected from clients, principle applicable on the information to gather not on the protection due to clients. For instance, it is expected more scrutiny when giving access to complex or risky products as compared to more standard products. Age of the client can also be a relevant criterion to adapt the level of investigation needed. Illiquid or risky instruments may require more information, and the guidelines propose a list of what is regarded as “necessary information” in this case.

In the same way, it is important to take into account the nature of the service to be provided: the inquiries and documentation of the knowledge and experience of the clients can be less detailed than in case of an investment advice service.

Arrangements necessary to understand clients and investments

Firms must have in place adequate policies and procedures to enable them to understand the essential facts about their clients. The guidelines highlight the importance to enrich these information, with related supporting documents (questionnaires, checklists, etc.) and procedures.

The guidelines also stress out the need for updating the information. To this end firms should adopt procedures defining what part of the information collected should be subject to updating and at which frequency. These procedures should also explain how the updating should be done and what action should be undertaken when necessary.

Firms should ensure that the information collected about clients is reliable. This means in particular that they should not rely unduly on clients’ self-assessment of its own capacity, ensure that all tools employed are adapted and take steps to ensure the consistency of client information. It is also recommended to back all assessment by objective criteria and not just judgment.

The guidelines provide also rules to identify persons subject to profiling and testing in case of joint accounts and corporate accounts. This identification should be documented in a procedure and recorded in a way that can be controlled.

Qualification of staff involved in the suitability assessment

The guidelines insist on the quality of the staff involved. The staff involved in material aspects of the suitability process should have an adequate level of knowledge and expertise.

Typically, it means that they must understand the role they play in the suitability assessment process and have sufficient knowledge of the relevant regulatory requirements and procedures.

The staff must have the skills necessary to be able to assess the needs and have sufficient expertise in financial markets to understand the financial instruments.

Archiving and record keeping

The importance of ex-post controls is further stressed out. Firms should maintain adequate recording and retention arrangements to ensure orderly and transparent record-keeping regarding the suitability assessment, including any investment advice provided and all investments (and disinvestments) made subsequently.

Record-keeping arrangements adopted by investment firms must be designed to enable firms to track ex-post why an investment was made.

The above outlines the main content of the guidelines but is not exhaustive.

We invite you to read the circular published by CSSF to appreciate the impact on your MiFID organisation.

Please consult as well our Deloitte web page dedicated to MiFID.

We remain at your disposal should you have any question with the above and should you wish to examine together how to optimise your MiFID organisation to these guidelines.

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